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# Unifying Concepts: Payback and Internal Rate of Return

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The management of Kitchen Shop is thinking of buying a new drill press to aid in adapting parts for different machines.
The press is expected to save Kitchen Shop \$8,000 per year in costs.

However, Kitchen Shop has an old punch machine that is not worth anything on the market and that will probably last indefinitely.

The new press will last 12 years and will cost \$41,595 (ignore income tax effects)

REQUIRED
1) Compute the payback period of the new machine
2) Compute the internal rate of return
3) Interpretive Question: What uncertainties are involved in this decision? Discuss how they might be dealt with.

#### Solution Preview

REQUIRED
1) Compute the payback period of the new machine
Payback period is defined as the expected number of years required to recover the original investment.

We consider the saving of \$8,000 per year to be the expected return of the new machine.

Payback period = Initial investment/Expected return per year

Payback period = 41,595/8,000 = 5.20 years

2) Compute the internal rate of return

The internal rate of return is defined as that discount rate which equates the present value of a ...

#### Solution Summary

This solution explains how to determine payback period and internal rate of return for Kitchen Shop with formula, calculations, answers and discussion. This solution is 347 words.

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